FRM Part I Practice Questions

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FRM Question Bank

AnalystPrep’s FRM part I practice questions reflect the difficulty and style of the live FRM exam part I. We provide you with a tailored, exam-centered question bank designed to teach you all the essentials of the topics that will make up the curriculum of the test. The question bank undergoes regular updates to incorporate the latest curriculum changes.

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Free FRM Part 1 Practice Questions

Question 1

Corporate Governance and Risk Management

Which of the following least explains why the board of directors needs to maintain independence from executive teams, including the chief financial officer, chief risk officer, and the CEO?

A) Board membership may change without adversely affecting the day-to-day running of the company

B) It gives the board an opportunity to hire qualified teams with specialized skills required within each role

C) Independence helps avoid conflict of interest

D) Independence is a compulsory regulatory requirement in most countries

Although the independence of the board from company executives has many benefits, it may not be a mandatory requirement in most countries. After the 2007/2009 financial crisis, there has been a global push to separate the board from executive teams in large part due to conflict of interests. In particular, a board member who doubles up as the chief risk officer, for instance, may overlook some risks during the appraisal process, with one eye on higher remuneration especially if the remuneration is directly linked to performance. Alternatively, there’s the danger of the board falling under the spell of a charismatic CEO.

All the above-mentioned financial disasters had a lot to do with misleading reporting. They all involved misrepresentation of the true state of affairs of the firm, including the nature of positions held and their financial implications. For example, in the case of the Chase Manhattan and Drysdale Securities, Drysdale borrowed more funds ($300m) than its capital ($20m) from Chase and inflated the value of the collateral it had. The borrowed funds were used to take bond positions which eventually declined in value, forcing Drysdale into bankruptcy. The borrowed funds could not be repaid.

Suppose revised macroeconomic data suggests the GDP will grow by 4% rather than 3% and that consumer sentiments will grow by 3% rather than 2%. Determine the revised return for Shiplink stock, assuming no new information is available regarding the firm-specific return.

Question 5

Principles for Effective Risk Data Aggregation and Risk Reporting

Vijay Kumar, Sonnet Bank’s Chief Risk Officer, writes in the management discussion and analysis (MD&A) section of bank’s annual report that Sonnet Bank, at all times, devotes its human and financial resources to the improvement of risk data aggregation as it considers data aggregation and reporting a part of the bank’s planning processes. He also writes that the bank has established multiple data models that are used as robust automated reconciliation measures. Kumar’s comments are aligned with one of the key principles of risk data aggregation. Identify that principle.

The 2nd principle of risk data aggregation (i.e. Data Architecture and Infrastructure) requires that a bank devotes its human and financial resources to risk data aggregation in times of stress. In addition, it requires that risk data aggregation and reporting should be a part of the bank’s planning processes and subject to business impact analysis. Banks should establish integrated data classifications and architecture across the banking group.

Question 6

Distributions

The probability that a patient suffering from typhoid will be treated successfully is 0.8. 40 patients are subjected to treatment. Determine the expected value of the number of patients who are treated successfully.

Question 8

Modeling and Forecasting Trend

A financial Risk Manager Exam candidate suggests that a model based on financial theory is likely to lead to a high degree of out-of-sample forecast accuracy. Which of the following best explains why the candidate is correct?

A) A solid financial background significantly increases the chances of the model working in the out-of-sample period as well as for the sample data used to estimate the model’s parameters

B) A financial background increases the chances of use of authentic input data

A model based on a solid financial background is likely to bring about good, realistic forecasts since there are high chances that the model will work in the out-of-sample period as well as for the sample data used to estimate the model’s parameters.

Question 9

Characterizing Cycles

A) An independent white noise is a time series that exhibits both serial independence and a lack of serial correlation while a normal white process is a time series that’s serially independent, serially uncorrelated, and is normally distributed

B) A normal white noise is a time series that exhibits both derail independence and a lack of serial correlation while an independent white noise is a time series that’s serially independent, serially uncorrelated, and is normally distributed

C) An independent white noise is a time series with equal mean and variance while a normal white noise is a time series where the mean is not equal to the variance

D) An independent white noise is discrete while a normal white noise is continuous

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